Startup losses keep most foreign carmakers in the red

SummaryGlobal carmakers may have made their presence felt in India with snazzy models but when it comes to profitability, everyone other than South Korea’s Hyundai and Japan’s Suzuki is posting losses.

Global carmakers may have made their presence felt in India with snazzy models but when it comes to profitability, everyone other than South Korea’s Hyundai and Japan’s Suzuki is posting losses. Later entrants like Ford, Renault, Skoda and Honda, together with a few other players, are estimated to have piled up total accumulated losses of R5,000-6,000 crore.

After posting a loss of R140 crore in FY12, Ford India’s accumulated losses are now among the highest at R1,344 crore, according to data with the registrar of companies (RoC). The US-based car maker also had to report to the Board for Industrial and Financial Reconstruction after its losses eroded over 50% of its net worth at the end of FY11.

Honda Cars’ FY12 losses almost trebled to R604 crore as lack of diesel models and a production slowdown due to component shortage hit sales. However, neither Honda nor Ford is very new to the Indian market — both started passenger car operations in 1995 but entered the high-volume small car market quite late.

Though German auto major Volkswagen posted a R332-crore profit in FY12, accumulated losses till date stand at R662 crore. Both Renault and Skoda saw losses widen in FY12 to R231 crore and R33 crore, respectively. In fact, Renault’s accumulated losses stood at approximately R361 crore as of March 31, 2012.

“Management believes the losses incurred by the company are primarily startup in nature and have been incurred in connection with the redesigning of the company’s business strategy and towards establishing the Renault brand image in India. Based on the projections for next four years, the management is confident that the company would be able to earn sufficient profits in the future to recoup the losses incurred,” a Renault India filing with RoC said.

While data for GM, Nissan and Toyota Kirloskar were not immediately available, analysts believe these companies are also likely in a similar situation.

VG Ramakrishnan, managing director at Frost & Sullivan, South Asia, said that getting a 10-12% market share in India will become increasingly difficult going forward. But these companies will need to continue investing for the future and establish a vendor base matching Hyundai or Maruti’s cost structures. “To make money, these companies need annual volumes of at least two lakh units,” he added.

Initially, most of the smaller players like Volkswagen and Honda had adopted a top-down approach in India to reduce investment size. The idea was to